Using Trade Remedies to Enforce Arbitration Awards

by Roger Alford

As I discuss in a recent article published in the Santa Clara Journal of International Law, one of the most significant developments signaling the convergence of trade and arbitration is the use of trade remedies to enforce arbitration awards. This is done primarily when a developed country threatens to remove preferential trade benefits to a developing country if that country does not honor its international arbitration commitments.

The WTO allows (but does not require) developed countries to grant preferential trade benefits to “promote the development, financial and trade needs of developing countries.” Many developed countries—including Australia, Canada, the European Union, and the United States—have established such “Generalized System of Preferences” or GSPs to promote trade with developing countries. The major benefit of GSP schemes is the unilaterally lowering of tariff barriers for products from beneficiary countries without a corresponding reduction in tariffs for the developed country’s products.

The discretionary nature of these schemes means that the trade benefits come with strings attached. In the United States and the European Union, for example, developing countries are subject to performance obligations with respect to matters such as drug trafficking, international terrorism, democracy, human rights, environmental protection, government corruption, unlawful expropriation, the rule of law, and good governance.

The United States imposes a number of conditions on beneficiary countries, including that they recognize and enforce arbitral awards in favor of United States nationals. Any country that wishes to secure beneficiary status under the GSP scheme must satisfy this criterion, and any country that fails to maintain this commitment jeopardizes their beneficiary status. The provision was added to the Trade Act of 1974 because of concerns that it was “contrary to sound U.S. policy to give…any… developing nation the favored treatment contemplated by the present legislation in the face of unwillingness to abide by solemn agreements to recognize as final and binding arbitration awards rendered in disputes between it and American parties.” (120 Cong. Rec. 39831).

The use of trade remedies to enforce arbitration awards is best illustrated by the ongoing dispute over Argentina’s refusal to honor adverse investment awards. On March 26, 2012, the Obama Administration announced that Argentina’s GSP beneficiary designation would be suspended “because it has not acted in good faith in enforcing arbitral awards in favor of United States citizens.” It was the first time in American history the United States denied GSP trade benefits to a developing country for its failure to honor arbitration commitments.

The decision was the culmination of an intense lobbying effort by American corporations who had succeeded in arbitration against Argentina pursuant to the United States-Argentina Bilateral Investment Treaty, but were unsuccessful in securing enforcement of those awards. The threat to suspend GSP benefits became a matter of intense bilateral concern. When President Barack Obama and Argentine President Christine Fernandez met for the first time in November 2011, the two heads of state spent the majority of their time discussing Argentina’s obligation to pay the arbitration awards, and the consequences that would flow from its failure to do so.

The United States is clearly calculating that such trade sanctions will alter Argentina’s cost-benefit analysis. Buenos Aires is set to pay approximately $18 million annually in increased duties as a result of the GSP suspension, far below the $300 million it owes to American corporations from the arbitration awards. Standing alone, the GSP suspension may be an insufficient incentive to comply given that the annual cost in additional duties represents only six percent of one arbitration award. But when the trade sanctions are considered in the context of other measures—such as limiting access to World Bank and Inter-American Development Bank credit and loan facilities or refusing to support the restructuring of Argentina’s $7 billion Paris Club debt—the combined result may nudge Argentina toward compliance, or at least a post-award settlement. The combined approach exposes Argentina to substantial risks, such as limiting its access to credit, altering its credit rating, constricting its export market, and discouraging foreign investment.

With the successful campaign to suspend Argentina’s GSP benefits, U.S. corporations are now actively pursuing a similar tactic with respect to other countries. Chevron, in particular, is lobbying the United States Trade Representative to suspend Ecuador’s preferential trade status under the Andean Trade Preference Act (“ATPA”) because of that country’s failure to honor arbitration awards in Chevron’s favor. USTR has warned that Ecuadorian President Rafael Correa that he is in jeopardy of losing ATPA beneficiary status. Ecuador is particularly vulnerable to losing its beneficiary status because the other three ATPA beneficiary countries have already, or soon will no longer be part of the program. The ATPA is unlikely to remain with Ecuador as the sole beneficiary.

The USTR has been reluctant to accept Section 301 petitions when an investor alleges that a host country has expropriated its investment, reasoning that such claims should be pursued in investment arbitration. But if an investor successfully pursues arbitration and still is unable to collect against the host country, the justification for pursuing a Section 301 action is enhanced. The overwhelming majority of Section 301 cases are concerned with foreign trade practices that impede exports or impose impediments to U.S. investments abroad. Section 301 measures almost always are designed with the same objectives as bilateral investment treaties: to benefit the U.S. economy by promoting trade, foreign investment and export opportunities. Therefore, a Section 301 action for refusing to recognize and enforce an arbitration award is plausible.

It appears that the strategy worked. Although one cannot draw a causal connection, in the wake of these trade actions, Argentina settled several ICSID cases, including the cases against American corporations. The United States has announced that Argentina GSP benefits could be restored if Argentina settles the ICSID arbitral awards, but it is doubtful that it will do so while other ICSID claims are pending or not enforced.

Investment arbitration was designed in a manner such that recognition and enforcement of adverse investment awards was presumed. That is not how things have played out, and the Argentina kerfuffle suggests that foreign investors increasingly may pursue trade remedies to secure enforcement of investment arbitration awards.

http://opiniojuris.org/2014/03/21/using-trade-remedies-enforce-arbitration-awards/

11 Responses

  1. Roger,
    Any thoughts on whether such trade remedies are permitted under WTO obligations?  I’ve only read the blog post, not the article, so apologies if you discuss it there.
    Simon

  2. Simon,

    Yes I do discuss that question in the article.  

    To the extent such measures would violate WTO trade rules—by imposing discriminatory internal regulations—the United States could argue that they are permitted under a WTO general exception.  Article XX(d) of the GATT 1994 allows Member States to take measures that are “necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement….”  The WTO would not permit a measure that simply sought Argentina’s compliance with its ICSID obligations.   As set forth in Mexico-Tax Measures on Soft Drinks, the “laws or regulations” contemplated by Article XX(d) refers to “rules that form part of the domestic legal system of a WTO member,” not “obligations of another WTO member under an international agreement.” (WT/DS308/AB/R, para. 69).  Thus, to the extent ICSID awards are part of domestic United States law, measures necessary to secure such compliance with those awards would arguably fall within Article XX(d).

    Federal legislation implementing the ICSID Convention provides that an ICSID award “shall create a right arising under a treaty of the United States” and that the “pecuniary obligations imposed by such an award shall be enforced and shall be given the same full faith and credit as if the award were a final judgment of a court of general jurisdiction of one of the several States.”  Thus, ICSID awards become enforceable domestic judgments in the United States by virtue of 22 U.S.C. § 1650a.  Accordingly, compliance with an ICSID award is not simply a question of international law; it is also a matter of federal law placing ICSID awards on the same footing as domestic court judgments.
     
    If the United States takes WTO-inconsistent action to pressure Argentina into compliance, it can credibly argue that enforcement of judgments is a legitimate state objective and that, having failed to collect on the judgments using alternative means, unilateral trade measures are necessary to secure compliance with WTO-consistent federal law.

  3. One problem though: the laws mentioned in Art XX(d) are not defined in terms of state interests, legitimate or otherwise. I cannot see this provision protecting this use of GSP schemes. Whether we will see a challenge is an interesting question. 

  4. I wonder whether the trade remedies can really be said to “secure compliance” with the federal legislation. My sense is they enforce the ICSID award, which is very different.
    Also, with “necessary,” you get into less trade restrictive alternatives, of which there are probably some.

  5. But Simon, I don’t even think you get that far. The federal legislation in this case is not protected by Art XX(d). This paragraph at most applies to legislation of the types specifically mentioned, eg competition, consumer protection and IP legislation – and even this is only possible by assuming (charitably, given the wording of the provision) that Art XX(d) deems these types of legislation to be WTO legal. Otherwise, does Article XX(d) not essentially comprise a category of illusory reference?

  6. Lorand,
    I don’t mean to suggest that this federal legislation is covered here. It may not be.
    But doesn’t the scope of XX(d) go beyond the listed examples? Note that it says “including.”
    There is a lot going on here. I think it merits an IELP blog post!

  7. Yes, it does say ‘including’. But what can that possibly mean? If the legislation is lawful under the GATT, then in every case that I can think of (admittedly I might be missing something) a trade measure to enforce it will ipso facto be lawful as well. And if it is not, then ipso facto nor will a measure to enforce it. The provision is therefore circular. You can break the circle in the cases mentioned with the charitable interpretation that these types of legislation are deemed to be lawful, and hence able to be enforced by a trade measure. It is not surprising that (again, unless I’ve missed something), Article XX(d) has never been applied successfully to any other kind of measure. What is more, if it could, the result would be the unfettered conditioning of imports on compliance with any domestic legislation, so long as this does not itself discriminate (to the extent that one can even distinguish between the legislation and its enforcement at this stage, and it is not even certain that this is a valid distinction). That cannot be right.
    Anyway, you are right, maybe this should carry over to your blog …

  8. I can remember in the early 90’s a US company getting its Congressman to get adopted a rider to the foreign assistance act that made payment of the US development aid funds to a state subject to full payment of any outstanding arbitral awards owed by that state. So this kind of hardball has a much older pedigree.
    Best,
    Ben

  9. Excellent piece, Roger. One may wonder how far could this strategy work with regard to states that may easily find themselves in a situation similar to Argentina’s in the near future (Ukraine perhaps?), especially when they are already in a situation in which US and EU backup is crucial for the survival of their economy. In the case of Ukraine it is also foreseeable that when the time comes they may even refuse the jurisdiction of ICSID and try to point those claims at Russia – hard to think they would happily enforce an award if they were forced to respond to arbitral claims. As Benjamin pointed out this kind of hardball has an old pedigree, but everything comes back in fashion – and the 1990s are coming back in many forms…

  10. In the early 90s there was no compulsory WTO dispute settlement. It has only got to be a matter of time before these uses of GSP preferences to pursue random non-development related goals come (once more) under judicial scrutiny.

  11. Some further thoughts:  http://worldtradelaw.typepad.com/ielpblog/2014/03/gsp-withdrawal-to-enforce-investment-arbitration-awards.html

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